Harley-Davidson Inc.

MASTERPROJECT FINANCIAL ANALYSIS PROJECT

THESIS DIRECTOR: JEAN-BAPTISTE BELLON
ALEXANDRE DELCOMMUNE
PAVEL SOKOLOV

EDHEC BUSINESS SCHOOL | MSc Finance 2014-2015

Table of Contents
Part 1: Analysis of the business model and DNA ................................................................. 2
Introduction .................................................................................................................................. 2
History ............................................................................................................................................. 2
Ownership Structure and Control ........................................................................................ 3
Corporate Governance .............................................................................................................. 4
A Global Business Strategy ...................................................................................................... 5
Production strategy .................................................................................................................... 7
Porter Competitiveness Analysis .......................................................................................... 9
Main Competitors..................................................................................................................... 10
Harley-Davidson Market Position ..................................................................................... 12
Part 2: Analysis of past performance .................................................................................... 14
Revenue Analysis ..................................................................................................................... 14
Profitability................................................................................................................................. 16
Liquidity, Solvency and Capital Structure ...................................................................... 17
Economic return ....................................................................................................................... 19
General remarks ....................................................................................................................... 20
Part 3: SWOT Analysis ................................................................................................................ 22
Harley-Davidson Group Strengths .................................................................................... 22
Harley-Davidson Group Weaknesses ............................................................................... 23
Harley-Davidson Group Opportunities............................................................................ 24
Harley-Davidson Group Threats ........................................................................................ 25
Part 4: Valuation ............................................................................................................................ 26
Introduction ............................................................................................................................... 26
Stock price evolution .............................................................................................................. 26
Analysts' recommendations................................................................................................. 30
Valuation ..................................................................................................................................... 32
Discounted Cash Flow Analysis ..................................................................................... 32
Comparable Companies Analysis .................................................................................. 34
Conclusion ....................................................................................................................................... 36
Appendix .......................................................................................................................................... 37
Bibliography & Sources of Data ............................................................................................... 48
End notes.......................................................................................................................................... 49

Part 1: Analysis of the business model and DNA

Introduction
Harley-Davidson is the world's leading and largest manufacturer of heavyweight
motorcycles, parts, and accessories, capturing half of the U.S. market and a third
of the global marketi, with 267,999 units sold representing sales revenue of
$5.57bn in 2014.
Harley-Davidson, Inc. is a publicly traded US-based company (NYSE: HOG), which
is active in two main business areas: the motorbike and motorbike accessories
sector (HDMC) and the financial services sector (HDFS).
The HDMC segment sells custom, cruiser, and touring motorcycles and offers a
complete line of Harley-Davidson motorcycle parts, accessories, riding gear and
apparel, and general merchandise. The company's products are sold to retail
customers through a network of independent dealers in North America, EMEA,
Asia-Pacific and Latin America regions.
The Financial Services division provides wholesale financing to dealers and retail
financing and insurance brokerage services to customers. HDFS conducts
business primarily in the United States and Canada.

History
From humble beginnings to one of the strongest brands in the world
The history of Harley Davidson dates back to the beginning of the 20-th century,
when a 20 year-old William S. Harley together with his childhood friend Arthur
Davidson began to design engine for a motor-bicycle. The motorcycle was
finished in 1903 with the help of Arthur's brother, Walter Davidson. Having
tested their power-cycle, Harley and Davidson brothers found it unable to climb
the hills without pedal assistance. They wrote off their first motor-bicycle as a
valuable learning experiment and immediately began to work on an improved
second-generation machine.
In September of 1907, Harley-Davidson became an incorporated business, and
on October 26th 1907, the four founders (William Harley, William Davidson,
Arthur Davidson and Walter Davidson) became part of the Motor Companys
first Board of Directors.
In 1950s and 1960s, Harleys were the bikes for those who were defined as not
fitting into society and who didn't care much about that (ex: Hells Angels). They
personified the motorcyclist mystique large, tough and dangerous outlaws clad
in black leather and covered in tattoos. That image of a tough-guy's bike
impressed young boomer males. Like much of the American culture, that spread
worldwide, resulting in the boom of sales in 1970, when baby boomers came into
their 20s.
2

In 1980s, sales went down as boomers settled down and raised families. In
response to this, Harley-Davidson created Harley Owners Group (H.O.G), a
motorcycle enthusiast club. Its benefits included exclusive products and product
discounts as well as one years full membership with the purchase of a new,
unregistered Harley-Davidson. The idea was quite effective and boomers started
returning to the ranks of bikers, buying two-wheel vehicles they had been
missing for 20 years.
The modern history of Harley Davidson starts from the management buyout in
1981, when the motorcycles manufacturer was sold for $80 million by AMF to a
group of thirteen investors led by Vaughn Beals and Willie G. Davidson.
Since that, the company has been rapidly developing delivering high-quality
motorcycles and improving its brand recognition. Indeed, Harley-Davidson
motorcycles are so distinctive that the company even wanted to trademark the
Harley sound in the mid of 90s.
As Warren Buffet once said about Harley Davidson: I like the kind of business
where your customers tattoo your name on their chests.

Ownership Structure and Control

Between 1986 and 2014, the shareholder structure of the Company evolved
from a privately held family-owned equity structure into a publicly listed
company in the hands of mutual funds and institutional investors, registered as
the major shareholders.
As of April 2015, the Harley Davidson Company accounts for a market
capitalization of US $12 billion with 211 million shares listed under the ticker
label HOG (Harley-Davidson Ownership Group), at the New York Stock
Exchange.
HOG ownership structure

Top 5 institutions stakes (US $mn)

0.04%

FMR LLC

17.79%

54.89%

27.28%

537

State Street
Corp

574

Baillie
Gifford & Co

645

Wellington
Manageme
Institutional Funds

Mutual Funds

Insiders

Other

897

Vanguard
Group

988
0

500

1000

The majority shareholders are institutional investors and mutual funds, holding
more than 82.2% of the shares, leaving the remaining 17.8% to the firms
personnel, management, historical family shareholders, and the greater public.
3

1500

In value, institutional investors (i.e. mutual funds and institutional funds) hold
more than $10.7 billion in HOG shares, constituting the largest type of
shareholder group.
Amongst institutional investors, the Vanguard Group heads the list, with 7.54%
of total HOGs shares held.

Corporate Governance
Excellent corporate governance has been a long-standing business practice in
Harley-Davidson, as it makes good business sense. Though the company believes
that motorcycling business is fun, it takes corporate governance seriously.
The board of directors (BoD) is composed of accomplished leaders from a range
of industries who meet regularly to review the company's objectives and discuss
plans for future growth. They are proud Harley-Davidson enthusiasts, and they
work to ensure that the decisions made by the company promote fairness,
financial transparency and accountability to all shareholders.
The company maintains the following main policies to continue its success in the
corporate governance area:

Board Committees: Established Audit, Sustainability, Human Resources,

and Nominating and Corporate Governance committees.

Board Independence: A majority of the BoD members is comprised of

independent directors. These directors must meet their independence
and other requirements of the NYSE and other applicable laws,
regulations and rules.

Committee Independence: The Audit Committee, Human Resources

Committee, and the Nominating and Corporate Governance Committee
are comprised entirely of independent directors

One share one vote policy: each of the companys common

shareholders has one vote for one share held. This mechanism helps to
protect minority shareholders against actions of controlling shareholders
such as the right to nominate candidates for the board of directors, preemptive right, right of inspection, appraisal rights, and a right to
dividends.

A Global Business Strategy

Harley-Davidson, Inc. is the parent companyii for the groups of two companies:
Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial
Services (HDFS).
The Group is split in two business divisions (HDMC and HDFS), which represent
two consolidated reportable segments, and four business segments
(motorcycles, parts and accessories, merchandising, financial services).
The Companys reportable segments are strategic business units that offer
different products and services and are managed separately based on the
fundamental differences in their operations.

Activities Structure
The Motorcycles reportable segment consists of Harley-Davidson Motor
Company which designs, manufactures and sells at wholesale street-legal HarleyDavidson motorcycles as well as a line of motorcycle parts, accessories, general
merchandise and related services. The Companys products are sold to retail
customers through a network of independent dealers. This division generated
about 89% of the groups total revenues in 2014.
Amongst the business segments integrated in this category are:
-

Motorcycles: $4,386 million of sales revenues in 2014 - (70% of

group revenues)
Parts & accessories: $875 million of sales revenues in 2014 - (14%
of group revenues)
General Merchandise: $285 million of sales revenues in 2014 - (4.6%
of group revenues)

The Financial Services reportable segment consists of Harley-Davidson

Financial Services, which provides wholesale and retail financing and insurance
5

and insurance-related programs primarily to Harley-Davidson dealers and their

retail customers.
HDFS conducts business principally in the United States and Canada and
generated $ 661 million of revenues in 2014 (10.6% of group revenues).
The HDFS division contributes to the development of business by offering
tailored financial solutions to Harley-Davidsons customers, helping the company
to enlarge its client base in North America.
In 2014, HDFS delivered services by continuing to finance a majority of new
Harley-Davidson motorcycles sold in the U.S. Internationally, HDFS entered into
agreements with local lenders, insurance companies and brokers to add 11
finance and insurance programs in Latin America, Asia-Pacific and EMEA during
the year, including retail finance programs in Vietnam, Chile, Russia, Portugal
and Finland. HDFS now facilitates 82 finance and insurance programs in 32
countries.
Global Growth Outlook
The Harley-Davidson Company conducts business on a global basis, with sales in
four main regions: North America, Europe/Middle East/Africa (EMEA), AsiaPacific and Latin America. Market shares of these markets will be analyzed later
in the report. The global motorcycles market had total revenues of $64.74 billion
in 2013, representing a compound annual growth rate (CAGR) of 0.7% between
2009 and 2013. Market consumption volume increased with a CAGR of 2.7%
between 2009 and 2013, to reach a total of 44.7 million units sold in 2013, and
45.6 million units in 2014.
The performance of the world market for motorcycles is forecasted to accelerate,
with an anticipated CAGR of 5.1% for the five-year period 2013 - 2018, which is
expected to drive the market to a global value of $82.97 billion by the end of
2018.
Three major trends that will drive growth through 2018 are:
An increasing number of households in industrializing countries will be
able to afford motorcycles as personal incomes rise.
Sales of electric motorbikes (e-bikes) and other electric models are
projected to rise sharply outside of China from what are currently very
modest levels of demand.
Motorcycle sales in a number of countries will be stimulated by
government programs, aimed at reducing environmental pollution caused
by automobiles.
Harley-Davidson is expected to benefit from a share of this growing world
market, provided that it focuses on high growth emerging markets like Chinaiii,
where the motorcycle market is forecasted to accelerate with an anticipated
CAGR of 4.2% for the five-year period 2013 2018, India with an anticipated
6

CAGR of 7.6% for the five-year period 2013 2018 iv, and Brazil, where the
motorcycle market is expected to grow at a CAGR of 8% from 2013 to 2018.
The Russian motorcycles market had growing revenues until 2013, representing
a compound annual growth rate (CAGR) of 41.8% between 2009 and 2013, but
the performance of the market is forecasted to decelerate, with an anticipated
CAGR of 4.3% for the five-year period 2013 2018.
In this context, Harley-Davidson identified China, India and Brazil as its highgrowth targeted prospective marketsv, while maintaining a substantial presence
in Japan, - its second largest international market in the world, where it
recovered the market leadership in 2014, and Canada, the only market where it
lost market share.

Production strategy
The Companys manufacturing strategy is based on the disciplined execution of
the Company's Continuous Improvement System (CIS).
The focus of CIS is to align people, process and technology to drive world-class
manufacturing capability across the firms global manufacturing facilities. The
Company believes CIS provides the framework to drive the highest levels of
safety and quality, increase efficiency and reduce costs, and more effectively
adapt to changing customer demands and market expectations.
Critical aspects of this manufacturing strategy include flexible manufacturing
processes and supply chains, together with cost-competitive and flexible labor
agreements.
As of 31.12.2014, Harley-Davidson Inc. was operating a 6-plant global
production network, with four manufacturing plants located in the U.S., two in
Wisconsin, one in Missouri and one in Pennsylvania, together with two
international assembly plants located in Brazil and India.
The Company operates a CKD (Complete Knock Down) assembly facility in
Brazil, which assembles motorcycles sold in Brazil from component kits sourced
from the Companys U.S. plants and its suppliers.
The Company also operates a manufacturing facility in India, which includes
both CKD assembly of certain motorcycles for sale in India, and, beginning in
2014, production of the Companys Street motorcycles for distribution to
markets outside of North America.
Like its U.S. manufacturing facilities, the Companys Brazil and India operations
are focused on driving world-class performance through the execution of CIS,
with flexible production processes to meet customer demands at reduced lead
times.
In order to adapt to the timing of retail sales and their respective seasonality, the
Company implemented surge manufacturing capabilities at its York,
7

Pennsylvania facility in the first half of 2013 and at its Kansas City, Missouri
facility in the first half of 2014.
Surge manufacturing capabilities provide the Company the flexibility to increase
production of motorcycles ahead of and during the peak selling season in the
North America region, and to keep inventory levels low in the low selling season.
This provides the Company the flexibility to increase the production of
motorcycles ahead of and during the peak retail selling season, allowing the
Company to more closely correlate the timing of production and wholesale
shipments to the retail selling season.
As a result of this flexible manufacturing capability, the Company's motorcycle
production and wholesale shipments now correlate more closely to the retail
selling season in the North America region. Prior to 2013, the Company
historically produced and shipped motorcycles at wholesale to its North America
region dealers at approximately the same level throughout the year.
In markets outside of the North America region, the Company typically
distributes motorcycles through regional warehouses.
Consequently, independent dealers and distributors in markets outside of the
North America region typically do not build significant inventory levels in the
non-riding season, and as a result, the wholesale shipments to these markets are
generally lower in the non-riding season than in the riding season.

Porter Competitiveness Analysis

Competitive Rivalry
Top 5 manufacturers of heavyweight motorcycles represent more than 94% of
the global market and 91% of the U.S. market.
The industry has seen significant consolidation and clustering over the last ten
years, with the buy-out of Ducati by the Volkswagen Group, the purchase and
ending of the Buell motorcycles lines by Harley-Davidson, and the revival of the
Indian motorcycle brand by Polaris industries.
Newcomers need either an existing infrastructure, or the financial and logistical
support of an automotive industrial group (e.g. VW, Polaris Industries, Honda,
Kawasaki, BMW), to enter the closed world of heavyweight motorcycles industry.
Major groups consider the motorcycle segment as a part of their activities,
whereas it represents the core business of Harley-Davidson.
In order to remain cost-efficient and competitive, major groups resort to
partnerships and synergies with suppliers (e.g. Bajaj Motors Harley-Davidson
partnership in India, Ducati-VW-Audi partnership in EU) in order to target new
geographical markets and new segments. Relying on low-cost assembly plants in
high-growth emerging countries remains another type of tactics to hedge
positions in developing markets.
New Entrants
The industry is characterized by high entry barriers, with high capital
requirements, clustering and a necessity for brand recognition prior to enter the
market.
The risk for existing manufacturers is low, especially since that traditional
manufacturers have hedged any potential threats arising from emerging
countries, by establishing strategic partnerships with local motorcycles
manufacturers there.
New entrants developing cutting-edge technologies (e.g. electric motorcycles)
often find themselves in need of capital once a certain development threshold
has been attained, and rely on partnerships with traditional manufacturers (e.g.
Brammo Inc. (electric motorcycles) and Polaris Industries) in order to survive.
Customers
The customer base is price-sensitive and highly fragmented, whereby switching
costs from one brand to another are low, and products in their respective
category are standardized. In other words, a 500 cc touring model from Polaris
(e.g. Indian Chieftain) will be comparable to Harleys model in the same category
(e.g. Harley-Davidson Street Glide Special).
9

Global markets have seen fierce price wars to keep and maintain volatile
customers sensitive to price-differentiation in the last 5 years.
Substitutes
Substitutes are rare, as new mobility types cannot substitute themselves for
existing motorcycles models. The motorcycle industry remains a genuine
segment with a faithful customer base.
Suppliers
The clustering in the motorcycle industry puts suppliers under pressure to
reduce their margins and adapt to an international distribution network.
Switching costs from one supplier to another are low, and hence, supplier
bargaining power is weak, in the heavyweight motorcycle segment. In some
cases, suppliers are compelled to close strategic partnerships amongst
themselves, so as to develop synergies (e.g. Shorai LFX Batteries with KIMPEX
Canada Motorcycles Parts) and reduce costs. vi

Main Competitors
Harley is facing a ruthless competition from the heavyweight motorcycles
segment industry, in particular from manufacturers of +600 cc engines, both on
its domestic U.S. market and on international markets.
The competitors take the form of domestic competition, with U.S. based Polaris
industries, reviving the Indian motorcycle and Victory market brand, and
eroding Harleys core customer base in the U.S. by taking increasing parts of
market shares per year, reaching a 3% market share in 2014.
International competition is mostly embodied by Japanese or European
manufacturers, such as Honda, Yamaha, BMW or Ducati, focusing on the
segments of sports or touring-type of motorcycles, with engines of a capacity
greater than 600 cubic centimeters.
The sector of heavyweight motorcycles is constituted by manufacturers that
either specialize in competition-inspired sports models, or touring models,
tailored for long road trips.
The Harley-Davidson Company confronts Japanese competitors on their home
market, producing heavyweight motorcycles, and trying to reproduce Harleytype models, in the segment of customized leisure-type of motorcycles.
Amongst the key assets of Harley with respect to the rest of the industry, are its
gross margin (36.4%) and high operating margin (18%), displaying a top-tier
profitability in a peers comparison, together with a profit pool benefitted from
the dominant market position in the U.S. (55% of market share) on the
heavyweight motorcycle segment.
10

A major weakness consists in the evolution of its aging core customer base (>35
years old white males), as well as some recent product recalls, which is not in the
habits of its international competitors.
Indeed, Harley recalled 66,421 Touring and CVO Touring bikes manufactured
between July 1, 2013 and May 7, 2014 with anti-lock brakes due to a front-wheel
locking problem.
The most dynamic and formidable international competitor remains Honda
Motor Corporation, displaying a Compound Average Growth rate of 10.9% per
year in global motorcycle sales since 2009, and reaching a market share of 11%
in the U.Svii.
Amongst European competitors, BMW and Ducati display the most efficient
concurrence, with a combined global market share averaging 14% of the total
heavyweight motorcycle segment.
Harley Davidson specializes in motorcycles, while motorcycle sales account for a
relatively small portion of its direct competitors' total revenues. For example,
Bayerische Motoren Werke, more commonly known as simply BMW, saw only
2.18% of its total revenues in Q2 2014 come from motorcycle sales.
Some of HOG's other publicly traded competitors include Honda, Polaris
Industries Inc. , Kawasaki Heavy Industries Ltd., Suzuki Motor Co., and Yamaha
Motor Co., Ltd.
Many of these companies do not trade on a formal U.S. stock exchange; however,
they are available for trade Over-The-Counter (OTC) and many of them are listed
on the Frankfurt Stock Exchange.
Only two of Harleys main competitors, Honda and Polaris Industries, are traded
on a formal U.S. stock exchange. Harley-Davidson also has a few privately held
competitors, such as Ducati Motor Holding SpA and Triumph Motorcycles Ltd.
Competitors

Units sold
(2014 figures)

Motorcycles as
a % of Sales

Polaris Industries

15 000

6.0%

U.S.

Product
Development

Non-core business
with Indian & Victory
motorcycle brands

10.3 mnviii

14.0%

U.S. and Asia

Distribution

Exchange Rate Risk

45 117

100.0%

U.S., Germany, Italy&

U.K.

Sports Model &

Brand appeal

No diversification

NA

23.2%ix

Asia and U.S.

Technical
innovations

U.S. market presence

BMW

123 465

2.2%

Germany, U.S.,
France, Italy, Brazil.

Polyvalent
models

Dependence on EU
market

Suzuki

2.03 mn

9.1%

Asia and U.S.

Automotive
synergies

International brand
recognition

Yamaha

NA

64.3%

Japan and U.S.

Diversified
product offer

International
Distribution

267 999

89.0%

U.S. Europe and

Japan.

Brand name &

customer
loyalty

Decreasing core
customer base /
Price /technical
recalls

Honda
Motorcycles
Ducati
Kawasaki Heavy
Industries

Harley-Davidson

Strong Market
Position

Main
Strength

Main weakness

Of all these competitors, financial analysts most frequently compare HOG to

Polaris Industries, even though motorcycles accounted for only 8% of Polaris'
total sales for FY 2013. The main segments of Polaris Industries' business, as
11

described in its 2013 10-K, are: off-road vehicles (67% of FY 2013 sales),
snowmobiles (8%), motorcycles (6%), small vehicles (3%), and parts, garments
and accessories (16%). Polaris sells two brands of heavyweight motorcycles:
Victory and Indian.
Polaris entered the heavyweight motorcycle market in 1998, with a Victory
motorcycle that belonged to the "cruiser" segment (Victory Motorcycles is the
motorcycle manufacturer and Polaris is the parent company), and the company
later purchased the Indian Motorcycle brand in 2011.
The Indian Motorcycle brand is the oldest motorcycle brand in the United States
(founded in 1901), and it is the only brand that has been around longer than
Harley-Davidson (founded in 1903). Polaris revived the Indian Motorcycle
brand, which used to be owned by an independent company initially known as
the "Indian Motorcycle Co.," after its founding company eventually stopped
production when it went bankrupt in 1953.

Harley-Davidson Market Position

In 2014, the Harley-Davidson Motor Company reached a U.S. market share of
54.1% in terms of revenues from sales of heavy motorcycles, down from 54.6%
in 2013 and 53.6% in 2012.
U.S. Heavyweight Motorcycle sales accounted in 2014 for over about 64% of the
companys overall motorcycle sales, making it the largest single geographic
market for Harley-Davidson.
Over the past few years, overall heavyweight motorcycle sales have declined
significantly in the U.S. while international sales have increased slightly.
International sales composed about 37% of Harleys total retail worldwide unit
sales in 2014.x
55
Harley Davidson US Market Share
54.5
54
53.5
53

2012

2013

2014

2015 E

Harley Davidson European Market

Share
15.2
15
14.8

The firm continues to maintain

leading domestic market share
in an uncertain environment,
which speaks highly about the
brand. Domestic (U.S.) unit sales
increased less than 1% for
Harley Davidson in 2014, while
industry unit sales expanded
2.5%, and European retail sales
rose by 8% versus a European
industry increase of sales of
13%, indicating some recent
weakness in market share
evolutionxi.

14.6
14.4
14.2
2012

2013

2014

2015 E

Revenues from international

and emerging markets
(excluding U.S. and Europe)
12

have consistently risen while U.S. revenues still haven't reverted to pre-recession
days.
The U.S. market did show signs of recovery and the total US sales have grown by
nearly 12% between 2011-2013.xii
In 2013, the Companys revenue from international sales of motorcycles and
related products to independent dealers and distributors located outside of the
United States was approximately $1.361 billion, or approximately 32.5% of net
revenue of the Motorcycles segment.
In 2013, worldwide independent dealer retail sales of new Harley-Davidson
motorcycles grew by 4.4% compared to 2012, including a 4.4% increase in the
U.S. and a 4.3% increase in international marketsxiii.
Europe accounted for about 50% of international sales, Canada for about 3.8%,
while Japan accounted for 5.6%xiv. International sales accounted for 36% of the
companys total revenues from sales.
In 2014, last recorded year, retail unit sales for 2014 were up 1.3 percent in the
U.S., 11.8 percent in the Asia Pacific region, 6.4 percent in the EMEA (Europe,
Middle East, Africa) region, 2.1 percent in the Latin American region. The only
region displaying a downward trend in retail unit sales was Canada, where sales
were down 10.8 percent.
In terms of revenues generated by geographic region, the U.S. remains the major
market, followed by the EMEA regionxv, accounting for more than 15% of total
revenues generated in 2014, followed by Canada, Japan and Australia, and other
remaining regions (i.e. Latin America, India, China and other Asian countries).
U.S. Motorcycle Market Share 2014
7%

5%
10%
10%

54%

10%
4%

Harley Davidson

Polaris

Honda

Kawasaki

Yahama

BMW

Other

13

Part 2: Analysis of past performance

Revenue Analysis
Company's revenues are generated by 2 segments Motorcycles & Components
(HDMC) and Financial Services (HDFS). The first division accounts for around
89% of Harley's sales, while second for the remaining 11%, and this balance
stayed pretty the same during the last 3 years.
Having been rising by 6.1% annually since 2012, HDMC sales reached $5.6bn in
2014.
HDMC Sales ($ thousands)

North America Region

United States
Canada
Total North America Region
EMEA
Japan
Australia
Other countries
Total Revenue From Motorcycles

HDMC Sales (units)

North America Region

United States
Canada
Total North America Region
EMEA
Europe
Other
Total EMEA
Asia Pacific
Japan
Other
Total Asia Pacific
Latin America
Total Worldwide Sales

2012

2013

2014

3,363,640
186,550
3,550,190
710,861
244,907
186,674
249,950
4,942,582

3,562,847
204,315
3,767,162
769,864
217,700
193,081
310,483
5,258,290

3,773,087
194,422
3,967,509
869,690
197,792
190,029
342,661
5,567,681

2012

2013

2014

161,678
10,573
172,251

168,863
11,062
179,925

171,079
9,871
180,950

37,027
6,000
43,027

36,076
6,533
42,609

38,491
6,832
45,323

10,642
13,839
24,481
10,090
249,849

10,751
16,139
26,890
11,415
260,839

10,775
19,299
30,074
11,652
267,999

Growth rate over the last 3 years was about 2 times lower than the one for
20002006 period, where it was 12.5% annually. The main reason for this is
the financial crisis of 2008. Motorcycle sales still havent recovered from it
(Harley sold 350,000 motorcycles in 2006 vs. 268,000 in 2014).
14

In addition to this, sales in Europe worsened as a result of a European debt crisis

and consequent slow growth of the economy (2009-2014 CAGR of Harley
motorcycles sold in Europe was only 1.1%)
Another reason is the ageing of one of Harleys primary consumers group baby
boomers.
However, the first two problems are common for the whole motorcycle industry.
As for the ageing of baby boomers, the company anticipated it well in advance
and as such several CEOs ago began an effort to attract buyers born after 1964.
Indeed, if we take a look at Harleys revenue share in its primary geographical
market US, we can see that over the last 3 years it was fluctuating around
54%xvi, being 53.3% currently. So, we can say that Harleys market share remains
pretty stable.
U.S. Motorcycle Registration Data
601+cc (Units in thousands)

Total new motorcycle registrations

Harley-Davidson new registrations
Harley's share
European Motorcycle Registration
Data 601+cc (Units in thousands)

Total new motorcycle registrations

Harley-Davidson new registrations
Harley's share

2012

2013

2014

299.4
161.3
53.9%

305.9
167.8
54.9%

313.6
167.1
53.3%

2012

2013

2014

319.8
38.5
12.0%

281.8
36.1
12.8%

300.4
36.2
12.1%

The same picture

can be observed
on the European
market,
where
Harleys
share
currently
constitutes 12%
with
12.3%
average over the
last 3 years.

In 2014, the company sold 64% of its bikes on domestic market (US), 17% in
EMEA, 11% in Asian region, 4% in Latin America and 4% in Canada. Pretty the
same regional composition of sales was seen in 2013 and 2012 years. While
Harley-Davidson remains an absolute leader in the United States with a share of
over 50%, it has much weaker presence in European region meeting around
12% of the total demand on heavyweight motorcycles. Such difference can be
explained by different customer preferences in these parts of the world
sportbike category represented nearly 38% of the European 601+cc market in
2014 vs. 10% in the US, while the touring and cruiser categories represented
only 26% in the region vs.
77% in the US.
HDMC Product Sales (2014)
Given that the company
specializes in touring and
Motorcycles
5%
custom bikes (79% of total
Parts & Accessories
units produced), it is not a
General Merchandise
surprise that we can see
16%
such a difference in Harleys
Other
sales in European and
American regions. Trying to
geographically diversify its
business, Harley-Davidson
79%
set a target 40% of sales
should come from abroad
by 2014.
15

However, in 2012 the company stopped believing its possible with only 35.3%
of the motorcycles sold abroad that year and increasing economic turmoil in its
most important international region Europe.
Considering the product composition, HDMC segment earns primarily from
Motorcycles sales (ca. 79%), while Parts & Accessories segment brings around
16% of motorcycle revenue and General Merchandise accounts for additional
5%.
HDFS Sales ($mn)

2012

2013

2014

United States
Canada
Europe
Other countries
Total Sales

607.9
24.5
3.7
1.8
637.9

609.6
24.5
4.3
3.2
641.6

627.3
23.7
5.7
4.1
660.8

Financial services segment

(HDFS) was growing at a
CAGR of 1.8% over the last
3 years, reaching $661mn
revenue by the end of 2014.
HDFS conducts business
principally in the US and
Canada.

Profitability
HDMC Gross figures
Gross Profit ($ thousands)

Gross margin

2,500,000

37%
36%
35%
34%
33%
32%
31%
30%

2,000,000
1,500,000
1,000,000
500,000
--

Operating income from the

Motorcycles segment was
up $132.5 million over
2013 led by a 3.9% increase
in wholesale shipments of
Harley-Davidson
motorcycles. In addition,
Motorcycles
operating
income benefited during
2014 from model-year
price increases as well as a
stronger product mix.

2009 2010 2011 2012 2013 2014

During 2009-2013 years

the company implemented restructuring of its U.S. manufacturing plants that
would allow it to become more flexible and cost competitive. These
implementations resulted in the gradual improvement of Harleys Motorcycle
segment profitability. Gross margin increased from 32.3% in 2009 to 36.5% in
2014, while operating margin more than doubled over the same period from
7.3% to 16.7%. Finally, net profit margin increased dramatically from the
increase in EBIT margin as well as the increase in investment income from
0.7% to 14.1% over 2009-2013 time interval.

16

HDMC Operating figures

1,200,000

EBIT ($thousands)

EBIT margin

1,000,000

20.0%
15.0%

800,000
600,000

10.0%

400,000

5.0%

200,000
--

0.0%
2009 2010 2011 2012 2013 2014

As for the financial services

segment, its operating
income was down slightly
from the prior year, falling
$5.3 million, or 1.9%
mainly because of a higher
provision for credit losses.
Amid growing revenues,
this decline resulted in a
drop in operating margin
from 43% level in 20122013 to 41% currently.

Going
forward,
the
Company
anticipates
further
pressure
on
Net Income ($thousands)
Net margin
Financial
Services
1,000,000
16.0%
operating income as a
14.0%
result of higher credit
800,000
12.0%
losses,
tightening
net
10.0%
600,000
interest margins, increasing
8.0%
competition and higher
400,000
6.0%
borrowing costs.
4.0%
200,000
Overall, having its EBIT
2.0%
margin decreased by half in
-0.0%
2009 as a result of financial
2009 2010 2011 2012 2013 2014
crisis,
Harley-Davidson
group managed to come back to pre-crisis operating efficiency levels.

HDMC Net figures

Liquidity, Solvency and Capital Structure

Harley-Davidson
carries
substantial amounts of debt on
its balance sheet (D/E of 182%)
as it is required to finance its
Financial Services division and
offer loans to customers. HDFS
arm may undermine companys
financial stability as it generates
both increased financial risk and
weak profitability when credit
standards tighten or credit markets become less liquid.
However, the company strives to hold enough liquid assets to cover its cash
needs for 12 months. It is a sensible strategy, given the risks HDFS brings to the
group.
Still, if we take a look at the coverage metrics, we can find out that CFO/Interest
expense is 275x now (so high due to retirement of $303 million of senior
unsecured long-term debt in February 2014) with 19.5x average for 2011-2012
Leverage Ratios
LT Debt/Equity
LT Debt/Total Capital
LT Debt/Assets
Total Debt/Assets
Debt/Equity
Debt/Capital
Net Debt/Equity
Net Debt/Capital

2012
1.65
0.52
0.44
0.57
2.17
0.69
1.51
0.48

2013
1.40
0.49
0.42
0.56
1.86
0.65
1.38
0.48

2014
1.21
0.43
0.38
0.57
1.82
0.65
1.42
0.50

17

period. This implies that the company generates more than enough cash to meet
its interest payments. At the same time, CFO/Total debt and FFO/Total debt are
improving, shortening the time Harley needs to repay all debt.
Coverage Ratios
Net Debt/EBITDA
Net Debt/(EBITDA-Capex)
Total Debt/EBITDA
EBIT/Interest Expense
EBITDA/Interest Expense
CFO/Interest Expense
Cash Dividend Coverage Ratio
LT Debt/EBITDA
Net Debt/Funds From Operations (FFO)
LT Debt/FFO
FCF/Total Debt
CFO/Total Debt

Cash Flow Activity ($thousands)

Cash from Operating Activities
Cash from Investment Activities
Cash from Financing Activities
Exchange Rate Effect
Net change in Cash & Equivalents

2012
3.18
3.79
4.58
22.02
25.70
17.41
6.46
3.47
4.11
4.49
0.11
0.15

2012
801,458
(261,311)
(990,073)
(8,886)
(458,812)

2013
2.89
3.43
3.91
25.56
29.26
21.59
5.72
2.94
3.57
3.63
0.15
0.19

2014
2.89
3.44
3.71
305.86
348.94
275.34
5.00
2.47
3.52
3.01
0.17
0.21

2013
977,093
(568,867)
(393,209)
(16,543)
(1,526)

2014
1,146,677
(744,650)
(536,096)
(25,863)
(159,932)

Operating Activities
The increase of operating cash flows in 2014 over 2013 was mainly because of
increased earnings, decrease in working capital as well as lower pension
contributions.
Larger operating cash flows in 2013 in comparison to 2012 were primarily due
to increased earnings and favorable changes in working capital.
Investing Activities
Companys investing activities consist primarily of CAPEX, net changes in finance
receivables as well as short-tem investments. Harleys capital expenditures were
$232mn, in 2014, $208mn in 2013 and $189mn in 2012.
Net cash flows from finance receivables were $143mn lower in 2014 than in
2013 as a result of an increase in motorcycle loan originations during 2014. The
same reason explains $321mn negative difference between 2013 and 2012
figures.
Changes in companys value of marketable securities positively affected
investing cash flows during the last 3 years with the corresponding figures of
$41mn, $35mn and $18mn for 2014, 2013 and 2012 respectively.
18

Financing Activities
Companys financing activities consist mainly of dividend payments, share
repurchases and debt activity.
Being currently around ($536mn), it jumped from ($990mn) in 2012 to
($393mn) in 2013. The explanation for negative values comes from companys
share repurchases as well as dividends paid that exceed the amount of equity
capital and debt raised.
The company paid dividends of $238mn in total or $1.1 per share in 2014,
$188mn or $0.84 per share in 2013 and $142mn or $0.62 per share in 2012.
Share repurchases, in turn, constituted $616mn or 9.3 million common shares in
2014, $479mn or 8.2 million common shares in 2013 and $312mn or 6.7 million
common shares in 2012
Fluctuation of cash flows from financing activities is, in turn, caused by Harleys
alternation from net reduction of debt to net issuance that took place in 2012.

Economic return
EPS as well as Sales per Share have been rising during the last 3 years, as a direct
result of Sales and Income improvement combined with a decline in the number
of shares outstanding. Cash reserves fall at a greater rate than the number of
shares, so now only $5.02 per share is immediately accessible for spending
versus $6.16 in 2012. This trend of distribution of money to shareholders is
healthy, given that the company can cover all its operating and investment
outflows with cash generated by operating activities and is still left with cash in
case of unpredicted charges.

Per Share Data

Earnings per Share ($)
Sales per Share (S)
Cash per Share ($)

2012
2.75
24.68
6.16

2013
3.30
26.82
5.96

2014
3.90
29.40
5.02

Payout ratio, as well as dividend per share, also reflects the companys
willingness to distribute cash to its shareholders. Dividend per share paid in
2014 was almost twice the size of the one in 2012, as a result of higher EPS as
well as higher proportion of income paid out (greater payout ratio).
Dividend Information
Payout Ratio
Dividend per Share ($)

2012
0.23
0.62

2013
0.26
0.84

2014
0.28
1.10

Companys ability to efficiently reinvest earnings can be described by ROE, ROA,

ROIC ratios.
Return on equity (ROE) reflects how efficiently the management uses reinvested
earnings to generate return to the companys shareholders.
19

Return on asset (ROA) shows how effectively the assets of the company are used
to generate earnings. It is a better indicator of operating efficiency, since it is not
levered as ROE and doesnt focus only on the cash flows attributable to
shareholders.
Return on Invested Capital (ROIC) and Cash Flow Return on Invested Capital
are used to assess a companys efficiency in allocating capital under control to
profitable investments. The figure can be compares with WACC to reveal
whether invested capital was used effectively.
All these figures were rising for Harley over the last 3 years, representing a good
management work and efficient use of investment resources.
In a more detailed analysis of ROE, we can identify its main drivers Net Profit
Margin, Asset Turnover and Equity Multiplier (Assets to Equity which can be
treated as a leverage indicator). Net profit margin increase as well as
improvement in generation of sales per assets positively affects return on equity.
Equity multiplier, however, decreased in 2013 due to 18% shareholders value
increase along with only 3% increase in assets. In 2014 Harleys equity
multiplier decreased again but increasing Profit Margin and Asset Turnover
offset this effect and resulted in a more than 2% improvement of ROE from
26.37% to 28.54%.

Returnsxvii
Return on Equity
Return on Assets
Return on Invested Capital
Cash Flow Return on Invested Capital

2012
25.07%
5.74%
10.5%
13%

2013
26.37%
6.62%
11.5%
15%

2014
28.54%
7.90%
11.7%
16%

Dupont Analysis
Net Profit Margin
Asset Turnover
Equity Multiplier

2012
11.18%
0.59
3.79

2013
12.44%
0.64
3.34

2014
13.56%
0.66
3.20

ROE

25.07%

26.37%

28.54%

General remarks
2014 was a successful year for Harley-Davidson group in terms of companys
sales growth as well as profitability improvement.
Moreover, the motorcycle producer has shown a stable positive trend in these
areas over the last several years what makes us believe sales and profitability
improvement is likely to continue in consequent years.
Although the companys market share has declined on 2 of its largest markets
US and Europe, Harley-Davidson motorcycle segment still maintains its leading
20

position with a share on U.S. market greater than 50%. Given the current
uncertain environment, companys performance speaks highly about the brand.
The group has pretty high leverage due to HDFS segment what may cause a
deterioration of companys credit ratings and higher cost of debt as a result.
However, the company has been decreasing its leverage over the last 3 years.
Moreover, Harley-Davidson prefers organic growth to M&A activity and is able to
fund it from its operating activities, so debt issuance is primarily used for stock
repurchases and dividend payments when the markets provide good conditions
for this.

21

Part 3: SWOT Analysis

Harley-Davidson Group Strengths
Strong and well-recognized brand
Harley-Davidson remains one of the strongest and well-recognized brands in the
world, which helps the company to attract and retain loyal clients.

Wide range of products and services provided

Harley-Davidson offers a broad portfolio of products and services through its two
business segments HDMC and HDFS. The company offers a variety of products
within its HDMC segment to meet the needs of different customers. HarleyDavidson designs, manufactures and sells motorcycles of six different categories:
Touring, Softail, Dyna, Sportster, Vrod and Street. The models of these categories
differ by their frames, engines, and other characteristics. In addition to this,
HDMC segment is involved in motorcycle parts, accessories, general merchandise
and related services businesses.
HDFS segment allows the company to offer a package of financial services for its
products to customers and dealer centers, giving it competitive advantage in
capturing higher market share in the regions where these services are primarily
provided U.S. and Canada.
Active research and development program
Harley-Davidson pursues a strong R&D program that facilitates innovation and
brings additional attention to the companys products. Its Product Development
Center undertakes creation and testing of innovative and better quality products.
The companys R&D activities focus on product development to continuously
maintain innovation. Harley-Davidson incurred R&D expenses of $138.3mn,
$152.2mn and $137.3mn in 2014, 2013 and 2012 respectively, representing 2.7%
of HDMC sales on average. Companys continuous focus on R&D program results
in launching of new models such as Softail bikes with 1584cc engines, equipped
with new features like new hand controls and anti-lock braking system option. At
the same time, active R&D program helps company to maintain leading positions
in touring and custom motorbike segments as well as improve companys overall
operating performance.
Improving profitability
Having launched restructuring program in 2009, Harley-Davidson group has
achieved impressive results, pulling up gross profit margin from 35.4% to
38.2%, operating profit margin from 15.2% to 20.4% and net profit margin
from 3.0% to 13.6% over the 2009-2014 period.
22

Harley-Davidson Group Weaknesses

Heavy dependence on domestic market
Harley-Davidson is focused primarily on its domestic market U.S. region, with
70.6% of revenues originating from there (63.8% for HDMC and 94.9% for
HDFS). As a result, companys performance is very dependent on regional factors
such as economic and political situation, demographics, weather conditions,
making the group more risky in comparison to more geographically wellbalanced competitors.
Heavy dependence on baby boomers
Harley Davidson is the brand whose sales dependent almost entirely on middleaged people, particularly Caucasian males. The category of so-called baby
boomers is becoming older and their demand on the motorcycles and related
products of the company falls. Though Harley has started its program of
attracting younger generation several CEOs ago, the average age of customers is
still going up. Moreover, the loyalty of younger generation to Harley-Davidson
brand is limited, given a current diversity of models suggested by competitors.
For them, Harley bikes do not represent totems of rebellion as they did for their
parents and grandparents in 1960s and 1970s.
So, in the end, the lack of customer base diversification is likely to dampen
groups revenues and significantly worsen its positions even on the U.S. market.

23

Harley-Davidson Group Opportunities

Emerging markets
The company's presence in emerging countries such as India can be very
beneficial.
First of all, the demand on heavyweight motorcycles in the region is rapidly
increasing. The market for motorcycles with engine displacement above 500cc
almost doubled in a fiscal year ending April 2013 to 16,000 units from 9000
units sold in 2012. Harley already has a dominant position in the country with
88% market share in the 800cc-1600cc segment. With increasing disposable
incomes and rising proportion of high-income groups in India, sales of the
company can grow further. The number of high net-worth individuals
(individuals with investable assets of $1mn or more) is expected to increase 7
times from current figures and reach around 1.5 million by 2020.
Secondly, the company can enter a lightweight motorcycle segment that is very
popular in India. Indeed, in autumn 2013 Harley-Davidson announced to
manufacture Street motorcycles in the region within the low price segment
targeting young audience. Given that motorcycle deliveries are expected to reach
20-25 million by 2020 with most of them corresponding to the lightweight
segment, entering this segment seems a reasonable strategy for HarleyDavidson.
Lightweight and electro bikes
Currently operating primarily in a heavyweight category, Harley-Davidson is
planning to capture a 250-300cc bike segment. These plans are very likely to
turn into reality as the company has already proved its commitment to evolving
along with shifting market trends, having launched production of Street 500 and
Street 750 company's first lightweight models.
Another growth opportunity is entering electro bikes market that is small at the
moment but can become very promising in future. The company has already
presented its electric model named LiveWire. The work on a potential launch of
this model is in full flow already. The company handed these bikes to its U.S.
customers for test-drive to estimate their satisfaction and analyze potential
critics. The company is currently looking to test the model in the same way in
Europe, Canada, Asia-Pacific, before launching mass production.
There are two main reasons why electro bikes market can be important for
Harley-Davidson.
Firstly, electric motorcycle market is still in embryonic stage of development,
promising CAGR of around 30% through 2023 in U.S. and Europe.
There could be a huge potential in this market, especially for a big manufacturer
with a strong brand name like Harley-Davidson.
Secondly, the manufacturing of electric motorcycles will help the company
attract outreach customers such as young adults and females, as well as improve
sales overseas, expanding both domestic and international customer base.
24

Harley-Davidson Group Threats

Raw materials
The company relies on third party suppliers to obtain raw materials. It may
experience supply problems relating to raw materials pricing, poor quality or
untimely delivery. An increase in prices of raw materials, most likely caused by
an increase in prices of commodities such as aluminum and steel, will adversely
affect companys costs and profitability as a result. Poor quality and untimely
delivery will have a negative impact on customer relations and business
reputation in general. Moreover, in certain circumstances, Harley-Davidson relies
on a single supplier to provide the entire requirement of a specific part. Such
situation makes the company very dependent on this supplier, but at the same
time the change in the established supplier relationship may cause disruption in
the companys production schedule.
Worldwide Competition
Harley-Davidson motorcycle division manufactures and sells motorcycles all over
the world. Many of the company's competitors have more diversified businesses
and can compete in all segments of the motorcycle market and in the automotive
market as well. In addition to this, the prices for Harley-Davidson bikes are
generally higher than those of its competitors, which is partly explained by the
brand name the company has. If the customers become more sensitive to prices,
then Harley-Davidson will be in competitive disadvantage.
Moreover, Harley-Davidson financial services division faces fierce competition
from stand-alone banks, insurance companies and other financial institutions
that may have access to additional sources of capital at more lucrative rates and
terms. If the company fails to address and respond to these competitive
pressures, it will experience the decline in profits as well as loss of its market
share.
Increasing emission regulations in Europe
Harley-Davidson Motorcycle business can face difficulties if stricter emission
regulations are implemented. According to Transportpolicy.net, Euro 4 emission
standards for motorbikes are expected to be introduced in 2016, while Euro 5
standards implementation for 2-wheel vehicles are planned from 2020 onwards.
Such implementations may push the company to adjust its manufacturing to new
standards, which could result in an increase in operating costs. Failure to comply
with new standards will result in fines and penalties that will also negatively
affect company's profits.

25

Part 4: Valuation
Introduction
We are doing a sell-side valuation of Harley-Davidson Group and as such we
firstly analyze the historical behavior of HOGs share price, comparing it with
peer companies share prices and evolution of relevant stock indexes.
Then we take a quick look at current brokers recommendations to understand if
the Harley-Davidson stock price is over/ or underestimated at the moment.
Finally, we perform our own valuation analysis and make a recommendation
based on the results obtained.

Stock price evolution

Evolution of share price over the last 10 years
Harley-Davidsons share capital is composed solely of common shares, which are
around 211mn as of 24 April 2015.

HOG Closing Price in US dollars

80
70
60

50
40
30
20
10
0
4-3-06

4-3-07

4-3-08

4-3-09

4-3-10

4-3-11

4-3-12

4-3-13

4-3-14

4-3-15

Analyzing the evolution of Harley-Davidsons share price over the last 10 years,
we can distinguish two main periods financial crisis period and post-crisis
period. Considering the former time interval, we can find out that the share price
fell down from its last decade maximum of $63.9 (November 2006) to the
minimum of $7.5 (March 2009), constituting a decrease of around 88%. The
general reason for such a poor performance is that Harleys Motorcycles
26

correspond to a luxury goodsxviii segment and as such people were less willing to
spend money on these items during the recession.
However, the company managed to survive the crisis and the share price started
growing again. This growth can be explained by the recovery of U.S. economy in
general and companys efforts to overcome the consequences of economic
downturn in particular. One of the companys implementations to beat the
recession was its restructuring program described earlier in this report.
Moreover, the motor company received a series of government loans totaling $2.3
billion during 2008 year. In February 2009, a notable investor, Warren Buffet,
delivered $300 million to Harley-Davidson through bond purchases, not only
helping the company to get additional financing but also improving overall
market perception of the companys prospects.
Comparison with main Indexes
We compare Harleys stock performance with S&P 500, which is often used as a
proxy for the whole U.S. economy, and Dow Jones Industrial Average.

Normalized Prices
200

Harley-Davidson

S&P 500

DJIA

180
160
140
120
100
80
60
40
20
0

27

It can be seen from the graphs that Harley-Davidson stock price is more volatile
than the values of the corresponding indexes. Indeed, during 2006-2007 years
when the U.S. economy was booming, Harley-Davidson outperformed the main
benchmarks.
Once the financial crisis of 2008 hit, the share price of the motorcycle
manufacturer started plummeting, showing worse results than the American
economy in general. The same trend continued during the post-crisis period
when both Harley and America were recovering from the recent financial hit.
Having fallen much greater than S&P 500 and DJIA, Harley-Davidsons share price
reached indexes levels in 2011-2012 and in 2013-2014 years delivered greater
returns.
The first quarter of 2015 appeared to be not very favorable for motorcycle
producer as the companys share price decreased by 7.39% during the first 3
months (31 Dec 2014 to 31 March 2015) and by 13.17% over the 4 months
ending 23 April 2015.
Comparison with main Peers

Normalized Share Prices

350

Harley-Davidson

BMW

Yamaha

Honda

Polaris

Kawasaki

Suzuki

300

250

200

150

100

50

0
26-04-10

26-04-11

26-04-12

26-04-13

26-04-14

28

To get a better understanding of how well Harley-Davidson is performing, it is

reasonable to compare it with other motorcycle producers.
We analyze the companys price performance versus its publicly traded peers
described in the first part. We do not consider Ducati, as the company is private
and cannot be considered separately from Audi (Volkswagen Group) that
acquired it several years ago. At the same time we dont consider Audi as a whole
company because the acquisition occurred only in 2012 and as such stock price
analysis of the German car manufacturer will be incorrect within the 5-year time
frame.
Though Harleys stock price evolution over the last 5 years cannot be called
brilliant, the company was far from being worst-performing among its rivals. If
not to take into account the last several days, only 2 companies delivered greater
total return from 2010 BMW and Polaris. Its important to remember that
motorcycle manufacturing is not the main business for both of them, so their
share price performance is not greatly affected by successes or failures in this
segment. As for the other competitors, Honda showed the weakest performance,
while Kawasaki did the best one, with total return from 2010 overcoming
Harleys one currently.
Harleys stock price drop, whats next?
Having outperformed main indexes as well as most of its competitors in postcrisis period, Harley-Davidson currently experiences a bearish trend. Price of the
companys common share has been decreasing during the last year, making the
motorcycle producer one of the worst performing S&P500 components currently.
Harleys share price decreased by 19.2% while S&P500 grew by 12.7% year to
date. One of the main reasons explaining this downward trend is a decrease in
expectations of the companys performance given the negative impact of weather
on domestic retail sales.
The reason for a sharp price drop at the end of April is explained mainly by the
Q1 2015 report published on April 21. Market reaction to the companys Q1
results appeared to be more negative than expected and was caused mainly by:

Lowered expectations of the companys management regarding motorcycle

units shipped Harley-Davidson expects shipments to rise 2-4% instead of 46% growth predicted earlier.

Companys focus on increased, aggressive competitive motorcycle

discounting that was one of the reasons of U.S. sales decrease by 0.7% versus Q1
2014 and that is expected to continue.

This reasonably makes us question whether the current market price is fair or
captures some of overly optimistic/pessimistic expectations.
In order to understand this we will do our own valuation, firstly describing
opinions of research analysts covering the company.
29

Analysts' recommendations
First quarter financial results made research analysts covering the company
review and update their recommendations as well as target prices. According to
Thomson Reuters Database, among 21 analysts presented, there is nobody
advising sell or strong sell of Harley-Davidson shares.
Contributor
ARGUS RESEARCH COMPANY
Permission Denied
WILLIAM BLAIR & COMPANY, L.L.C.
Permission Denied
Permission Denied
Permission Denied
Permission Denied
Permission Denied
Permission Denied
LONGBOW RESEARCH
KEYBANC CAPITAL MKTS
MILLMAN RESEARCH ASSOC
Permission Denied
WEDBUSH SECURITIES INC.
RAYMOND JAMES
Permission Denied
Permission Denied
STIFEL NICOLAUS & COMPANY,INC.
TIGRESS FINANCIAL PARTNERS
WELLS FARGO SECURITIES, LLC
WUNDERLICH SECURITIES, INC.

Current Recommendation
3 - HOLD
1 - OUTPERFORM
1 - OUTPERFORM
2 - OUTPERFORM
3 - NEUTRAL
3 - EQUALWEIGHT
2 - BUY/NEUTRAL
2 - OVERWEIGHT
3 - HOLD
2 - BUY
3 - SECTOR WEIGHT
3 - HOLD
2 - OVERWT/CAUTIOUS
1 - OUTPERFORM
3 - MARKET PERFORM
2 - OUTPERFORM
1 - BUY (1)
1 - BUY
2 - BUY
1 - 1 OUTPERFORM
3 - HOLD

Review Date
13-Apr-2015
22-Apr-2015
21-Apr-2015
22-Apr-2015
25-Apr-2015
21-Apr-2015
09-Mar-2015
21-Apr-2015
21-Apr-2015
22-Apr-2015
21-Apr-2015
21-Apr-2015
23-Apr-2015
21-Apr-2015
22-Apr-2015
21-Apr-2015
23-Apr-2015
21-Apr-2015
08-Oct-2014
22-Apr-2015
21-Apr-2015

Target Price ($)

70
73
60
64
66
66
55
69
67
74
63
67
73
57

Number of analysts advising (total)

Strong Buy
Buy
Hold
Sell
Strong Sell
0

30

However, not all of the 21 analysts took into account the recent Q1 report and as
such we further proceed only with the ones who did.

Number of analysts advising (recommendations

updated after 21 April 2015)
Strong Buy
Buy

Hold
Sell
Strong Sell
0

With no sell recommendations and the average target price of $66 per share,
research analysts have a positive view of the company and believe HarleyDavidson is currently undervalued.
Less than 30% of analysts see very limited room for share price improvement
and recommend to hold.
With the average target price of $66 vs. current market price of $57, there is
pretty good upside potential for the companys shares (around 15.8%).

In the next part of this chapter, we do our own valuation to understand if the
current market price is justified or not.

31

Valuation
We consider two widely used approaches in estimating the intrinsic value of
Harley-Davidson Discounted Cash Flow approach and Comparable Company
Analysis, both equally weighted and implemented as of 25 May 2015.
Discounted Cash Flow Analysis
We use discounted cash flow approach (DCF) obtaining the intrinsic value of
$55.6 per share, representing a downside of 2.5% (please see Appendix 2.9 for
more detailed figures). Our method involves estimating the Enterprise Value
using projections of future Free Cash Flows to Firm (FCFF) and then obtaining the
Equity Value adjusting EV for Net Debt.
Applying the DCF method, we distinguish two future periods: Forecast and
Terminal. The first one corresponds to years from 2015 to 2020, while the second
refers to the years starting from 2021. We use Exit Multiple Method to estimate
the residual value of the company in terminal period.
Some of the operating figures like Sales, COGS, SG&A etc. are estimated separately
for both divisions and then added together, as the discount rate used (WACC)
corresponds to the whole companys cash flows.
Sales
Sales were forecasted separately for HDMC and HDFS segment.
For motorcycle division, the number of motorbikes shipped in 2015 is estimated
relying on the companys management expectations. In their Q1 2015 report,
Harleys representatives reviewed their forecasts for shipment growth from 46% to 2-4%, as a result of YoY sales decrease.
Based on this information, we expect 278,848 Harley's motorcycles shipped
worldwide in 2015. Considering the shipment growth from 2016 to 2020, we
rely on the IMF forecasts of the world GDP growth.
Having analyzed the difference between the growth of units shipped and worlds
real GDP growth, we came to conclusion that it is not significant and as such, we
can assume that the former will go in line with the latter.
The average spending per motorcycle shippedxix increased by 1.1% and 1.9% in
2013 and 2014 years respectively. We believe that by 2020 this increase will
adjust to the typical targeted level of inflation for developed countries 2%.
Forecasting separately units shipped and the average price of the motorcycle
together with accessories, we then find a product of this that reflects the dollar
sales expected.
Financial services segment is very closely linked to the motorcycle one and we
believe this strong connection will remain in future. We forecast HDFS sales as a
proportion of HDMC sales, relying on the last 3-year figures.

32

COGS and SG&A

Operating costs were forecasted as a proportion of sales. We relied on the last
year figures, as the company has been improving its EBIT margin year-to-year
since 2009. Now, Harley-Davidson has finished its restructuring program, and we
believe it will be able to maintain achieved margins in future.
Capex
Capital expenditures as a proportion of total sales are quite stable over the last 3
years. The company is not expected to abnormally expand and increase its PPE in
the upcoming years, so we leave Capex/Sales ratio constant at a current level of
3.5%.
Depreciation and Amortization
D&A is related to the value of Capex and hence to the value of Salesxx. Currently,
the total depreciation is less than Capex and we believe this inequality will
remain at least till 2020, so we do not assume that D&A=Capex by 2020.
We forecast depreciation expense separately for HDMC and HDFS segments as
proportions of sales, assuming that these proportions will approach 3-year
historical average by 2020.
Working Capital
Working capital is calculated as Inventories plus Receivables less Payables. Each
of these 3 components is estimated relying on days outstanding.xxi We assume
that these figures will approach the average ones over the last three years by
2020. (For WC figures, please see Appendix: 2.6)
WACC
Risk-free rate was taken as a current YTM of a 10-year U.S. government bond
with a value of 2.2%. The market risk-premium of 5.78%xxii was taken from
Damodarans Database, while equity beta of 1.49xxiii was downloaded from
Thomson Reuters Database. HOGs cost of equity is estimated to be 10.8%.
Companys cost of debt was found as a weighted average current yieldxxiv of
different debt issues with weights equal to the dollar amounts of these issues
outstanding. The corresponding figure appeared to be 3.05%.
Finally, in order to estimate companys cost of capital, we need to know the
percentage of debt in the capital structure as well as the corporate tax rate. The
latter was considered to be 35.5% as expected by the companys management.
As for the former, we needed to know the market value of debt and the market
value of equity.
33

The market value of equity is simply the companys market capitalization. As for
the debt, we downloaded detailed descriptions of companys bond and loan
issues and the dollar amounts still outstanding. In this description one could have
found the current price of each issue that was used to calculate the total market
value (price) of HOGs debt. Having done all the necessary calculations, we
obtained WACC of 5.6%.
Exit Multiple Method
There are typically two options to estimate the residual value of the company:
Gordon Growth Model that assumes some constant growth of FCFF till infinity
and Exit Multiple Method that shows us the value of the company in the end of
the forecasted period as if we are going to sell it at a price implied by peer
multiples. The first approach is very sensitive to the terminal period assumptions
imposed and as a result may give quite imprecise figures, so we prefer to apply
the second one.
As Harley-Davidson operates in a capital-intensive industry, where operating
profit is strongly affected by the depreciation policy, we use EV/EBITDA multiple
to estimate the value of our company in 6 years. For this purpose, we use a set of
6 initial peers and estimate the median EV/EBITDA 2015E. We cannot know what
will happen on the market in 6 years and how trading multiples will change, so
we assume EV/EBITDA 2015E equals EV 2020/EBITDA 2021E. Then, we multiply
the obtained figure by the EBITDA forecasted for 2021 year and get HOGs EV in 6
years. (For information regarding peers and their trading EV/EBITDA 2015
multiples, please see Appendix 2.8)
Comparable Companies Analysis
We value the company relying on a set of comparable companies multiples
separately for Motorcycle and Financial Services divisions.
Motorcycle Division
We use the peer companies described in the previous parts, because they serve as
a good set of comparables for Harley-Davidson. As for the multiples applied, we
apply EV/2015E EBIT and EV/2015E EBITDA onlyxxv. The choice of these
multiples is justified by the desire to make our valuation independent of capital
structure and taxes. In addition to this, EV/EBITDA multiple allows to ignore
distortions that may arise from differences in D&A policies.
We dont consider BMW as well as Honda Motor because it is explicitly stated
that the companies have financial services divisions, while we want to use pure
manufacturing comparables in the estimation of HDMC value.
The remaining 4 peersxxvi result in a median EV/EBITDA multiple of 7.8x and
EV/EBIT of 11.0x with implied HDMC enterprise values of $9,9bn and $11.9bn
respectively. The HOGs debt is entirely issued by its financial services segment
and as such the equity value of the motorcycle segment is enterprise value plus
cash.
34

Once we estimated equity values using two multiples, we average them and
obtain the final figure of $11.5bn.
Financial Services Division
In order to estimate financial services division, we use a MV/BV multiple and set
it equal to one as there is usually no significant difference between market and
book value of equity of non-distressed financial companies.
The resulting figure of $975.9mn is added to HDMC equity value to obtain the
total value of the company.
Harley-Davidson Equity Value
The total equity value of Harley-Davidson equals to $12.5bn ($59 per share)
what represents an upside over the market price of 3.5% only. (For more
information regarding comparable companies valuation please see Appendix 3)

35

Conclusion
With a final intrinsic value of HOGs share price estimated at $57.3xxvii, we get an
upside of 0.5% only and as a result we issue the recommendation to hold.
Our conclusion does not contradict research analysts recommendations, though
on average they have a more positive perception of companys opportunities.
We see a company with solid financials and strong market positions (particularly
in the U.S), high profitability and a very loyal customer base. Still, the motorcycle
manufacturer faces some threats and possible events that may deteriorate its
performance.
However, the question of being a good investment target is more about how
current market capitalization reflects companys intrinsic value. In other words,
the company may have brilliant prospects, but if they are fully reflected in the
share price, then there is very limited potential for share price growth.
According to our valuation analysis, Harleys shares are fairly priced by the
market and fully include both possible threats and probable opportunities
discussed earlier in this report.

36

Appendix
Financial Data
1.1: Consolidated Income Statement (in $ thousands, except for per share data)
2010

2011

2012

2013

2014

Revenue:
Motorcycles and related products
Financial Services

4,176,627

4,662,264

4,942,582

5,258,290

5,567,681

682,709

649,449

637,924

641,582

660,827

4,859,336

5,311,713

5,580,506

5,899,872

6,228,508

(2,749,224)

(3,106,288)

(3,222,394)

(3,395,918)

(3,542,601)

(272,484)

(229,492)

(195,990)

(165,491)

(164,476)

(3,021,708)

(3,335,780)

(3,418,384)

(3,561,409)

(3,707,077)

1,837,628

1,975,933

2,162,122

2,338,463

2,521,431

(93,118)

(17,031)

(22,239)

(60,008)

(80,946)

(1,020,371)

(1,060,943)

(1,111,232)

(1,126,884)

(1,159,502)

(163,508)

(67,992)

(28,475)

2,131

--

--

--

--

--

--

(1,276,997)

(1,145,966)

(1,161,946)

(1,184,761)

(1,240,448)

560,631

829,967

1,000,176

1,153,702

1,280,983

5,442

7,963

7,369

5,859

6,499

Interest Expense

(90,357)

(45,266)

(46,033)

(45,256)

(4,162)

Loss on Debt Extinguishment

(85,247)

--

--

--

--

Total Revenue
Motorcycles and related products (COGS)
Financial Services Interest Expense (COGS)
COGS
Gross Profit
Financial Services Provision for Credit Losses
Selling, administrative and engineering expense
Restructuring expense (benefit) and asset
impairment
Goodwill Impairment
Operating expenses
Operating Income (EBIT)
Investment Income

Income before Provision for Income Taxes

Provision for Income Taxes
Income from Continuing Operations
Income (Loss) from Discontinued Operations, net of tax
Net Income

390,469

792,664

961,512

1,114,305

1,283,320

(130,800)

(244,586)

(337,587)

(380,312)

(438,709)

259,669

548,078

623,925

733,993

844,611

(113,124)

51,036

--

--

--

146,545

599,114

623,925

733,993

844,611

9,449

(5,616)

1,400

(18,009)

(36,808)

(2,972)

18,219

(10,144)

2,157

20,722

Other Comprehensive Income, net of tax

Foreign Currency Translation Adjustment
Derivative Financial Instruments
Marketable Securities

(133)

460

350

(953)

(424)

41,849

(123,574)

(122,551)

291,807

(165,757)

48,193

(110,511)

(130,945)

275,002

(182,267)

194,738

488,603

492,980

1,008,995

662,344

3,483

--

--

--

--

51,676

(110,511)

(130,945)

275,002

(182,267)

Net Income

146,545

599,114

623,925

733,993

844,611

Dividends

(94,145)

(111,011)

(141,681)

(187,688)

(238,300)

Adjustments

(40,591)

--

--

--

--

Pension and Postretirement Benefit Plans

Total Other Comprehensive Income, net of tax
Comprehensive Income
Adjustments to Comprehensive Income
Increase (Decrease) in Accumulated Other Income (BS)

37

Increase (Decrease in Retained Earnings)

11,809

488,103

482,244

546,305

606,311

Basic

1.11

2.35

2.75

3.30

3.90

Diluted

1.11

2.33

2.72

3.28

3.88

Basic

(0.48)

0.22

--

--

--

Diluted

(0.48)

0.22

--

--

--

Basic

0.63

2.57

2.75

3.30

3.90

Diluted

0.63

2.55

2.72

3.28

3.88

Cash Dividends per share

0.40

0.475

0.620

0.840

1.100

EPS from Continuing Operations:

EPS from Discontinued Operations:

EPS

1.2: Consolidated Balance Sheet (in $ thousands)

2009

2010

2011

2012

2013

2014

Assets
Current Assets
Cash & Cash Equivalents

1,630,433

1,021,933

1,526,950

1,068,138

1,066,612

906,680

Marketable Securities

39,685

140,118

153,380

135,634

99,009

57,325

Accounts Receivable

269,371

262,382

219,039

230,079

261,065

247,621

1,436,114

1,779,458

1,760,467

1,743,045

1,773,686

1,916,635

Inventories

323,029

326,446

418,006

393,524

424,507

448,871

Assets of discontinued operations

181,211

--

--

--

--

--

--

288,887

229,655

188,008

144,807

98,627

179,685

146,411

132,331

110,853

103,625

89,916

Finance Receivable

Restricted Cash
Deferred Income Taxes
Other Current Assets

282,421

100,991

102,378

181,655

115,492

182,420

4,341,949

4,066,626

4,542,206

4,050,936

3,988,803

3,948,095

3,621,048

4,238,111

4,026,214

4,038,807

4,225,877

4,516,246

906,906

815,112

809,459

815,464

842,477

883,077

--

--

--

--

244,871

--

31,400

29,590

29,081

29,530

30,452

27,752

177,504

213,989

202,439

171,845

3,339

77,835

76,711

67,312

64,765

64,191

69,221

75,092

Total Non-Current Assets

4,813,569

5,364,114

5,131,958

5,119,837

5,416,237

5,580,002

Total Assets

9,155,518

9,430,740

9,674,164

9,170,773

9,405,040

9,528,097

Accounts Payable

162,515

225,346

255,713

257,386

239,794

196,868

Accrued Liabilties

514,084

556,671

564,172

513,591

427,335

449,317

69,535

--

--

--

--

--

189,999

480,472

838,486

294,943

666,317

731,786

1,332,091

751,293

1,040,247

437,162

1,176,140

1,011,315

Total Current Assets

Non-Current Assets
Finance Receivable
PPE
Prepaid Pension Costs
Goodwill
Deferred Income Taxes
Other LT Assets

Liabilitites & Shareholders' Equity

Current Liabilities

Liabilities of Discontinued Operations

ST Debt
Current Portion of LT Debt

38

Total Current Liabilities

2,268,224

2,013,782

2,698,618

1,503,082

2,509,586

2,389,286

4,114,039

4,520,591

3,843,886

4,370,544

3,416,713

3,761,528

Pension Liability

245,332

282,085

302,483

330,294

36,371

76,186

Postretirement Healthcare Liability

264,472

254,762

268,582

278,062

216,165

203,006

Non-Current Liabilitites:
LT Debt

Deferred Income Taxes

--

--

--

--

49,499

--

155,333

152,654

140,339

131,167

167,220

188,805

--

--

--

--

--

--

Total Non-Current Liabilities

4,779,176

5,210,092

4,555,290

5,110,067

3,885,968

4,229,525

Total Liabilities

7,047,400

7,223,874

7,253,908

6,613,149

6,395,554

6,618,811

Preferred Stock

--

--

--

--

--

--

Common Stock

3,368

3,382

3,391

3,413

3,432

3,442

871,100

908,055

968,392

1,066,069

1,175,052

1,265,257

Retained Earnings

6,324,268

6,336,077

6,824,180

7,306,424

7,852,729

8,459,040

Accumulated Other Comprehensive Loss

(417,898)

(366,222)

(476,733)

(607,678)

(332,676)

(514,943)

(4,672,720)

(4,674,426)

(4,898,974)

(5,210,604)

(5,689,051)

(6,303,510)

Total Shareholders' Equity

2,108,118

2,206,866

2,420,256

2,557,624

3,009,486

2,909,286

Total Liabilities & Shareholders' Equity

9,155,518

9,430,740

9,674,164

9,170,773

9,405,040

9,528,097

Other LT Liabilities
Commitments & Contingencies

Shareholders' Equity

Additional Paid-in Capital

Treasury Stock

1.3: Consolidated Cash Flow Statement (FactSet database, in $ millions)

2010

2011

2012

2013

2014

Operating Activities
Net Income / Starting Line

147

599

624

734

845

Add: Depreciation, Depletion & Amortization

255

180

169

167

179

Add: Deferred Taxes & Investment Tax Credit

(18)

88

128

53

(8)

Add: Other Funds

573

(64)

(6)

119

175

Funds from Operations

957

803

916

1,073

1,191

Changes in Working Capital

207

82

(114)

(96)

(45)

Receivables

13

48

(14)

(37)

(12)

Inventories

(95)

21

(46)

(51)

Accounts Payable

215

120

(11)

(54)

19

Other Assets/Liabilities

(24)

(111)

41

(1)

1,163

885

801

977

1,146

Capital Expenditures

(171)

(189)

(189)

(208)

(232)

Net Sale of Investments

(100)

(13)

18

35

41

184

143

--

Net Operating Cash Flow

Investing Activities

Purchase of Investments
Sale/Maturity of Investments
Other Funds
Other Uses
Other Sources
Net Investing Cash Flow

84

130

23

40

41

344

138

(91)

(396)

(553)

(2,325)

(2,622)

(2,859)

(3,244)

(3,568)

2,669

2,760

2,768

2,848

3,015

73

(64)

(261)

(569)

(745)

39

Financing Activities
Cash Dividends Paid

(94)

(111)

(142)

(188)

(238)

(217)

(266)

(429)

(578)

(2)

(225)

(312)

(479)

(616)

46

51

38

(1,850)

(47)

(637)

160

246

81

66

55

63

34

(1,856)

(309)

(990)

(393)

(536)

Exchange Rate Effect

(8)

(9)

(17)

(26)

Miscellaneous Funds

(0)

(0)

(615)

505

(459)

(2)

(161)

993

696

612

769

914

Change in Capital Stock

Repurchase of Common & Preferred Stk.
Sale of Common & Preferred Stock
Issuance/Reduction of Debt, Net
Other Funds
Net Financing Cash Flow

Net Change in Cash

Free Cash Flow
Free Cash Flow per Share
Free Cash Flow Yield (%)

12

Net Operating Cash Flow

1,163

885

801

977

1,146

Capex

(171)

(189)

(189)

(208)

(232)

993

696

612

769

914

FCFF

1.4 HDMC Income Statement (in $ thousands)

2010

2011

2012

2013

2014

4,176,627

4,671,942

4,952,748

5,268,480

5,577,697

4,176,627

4,671,942

4,952,748

5,268,480

5,577,697

(2,749,224)

(3,106,288)

(3,222,394)

(3,395,918)

(3,542,601)

(881,888)

(926,832)

(977,782)

(995,378)

(1,023,450)

(163,508)

(67,992)

(28,475)

2,131

--

Revenue:
Motorcycles and related products
Total Revenue
Costs and expenses
Motorcycles and related products COGS
Selling, administrative and engineering expense
Restructuring expense (benefit) and asset
impairment
Goodwill Impairment

--

--

--

--

--

Total Costs and Expenses

(3,794,620)

(4,101,112)

(4,228,651)

(4,389,165)

(4,566,051)

Operating Income (EBIT)

382,007

570,830

724,097

879,315

1,011,646

Gross margin

34.18%

33.51%

34.94%

35.54%

36.49%

Operating margin

9.1%

12.2%

14.6%

16.7%

18.1%

Investment Income

5,442

132,963

232,369

190,859

126,499

Interest Expense

(90,357)

(45,266)

(46,033)

(45,256)

(4,162)

Loss on Debt Extinguishment

(85,247)

--

--

--

--

Income before Provision for Income Taxes (EBT)

211,845

658,527

910,433

1,024,918

1,133,983

Provision for Income Taxes

(66,495)

(150,756)

(233,385)

(279,841)

(338,453)

Income from Continuing Operations

145,350

507,771

677,048

745,077

795,530

Income (Loss) from Discontinued Operations, net of tax

(113,124)

51,036

--

--

--

32,226

558,807

677,048

745,077

795,530

Net Income

40

1.5 HDFS Income Statement (in $ thousands)

2010

2011

2012

2013

2014

Financial Services

683,329

649,474

639,482

643,067

662,345

Total Revenue

683,329

649,474

639,482

643,067

662,345

Financial Services Interest Expense

(272,484)

(229,492)

(195,990)

(165,491)

(164,476)

Financial Services Provision for Credit Losses

(93,118)

(17,031)

(22,239)

(60,008)

(80,946)

Selling, administrative and engineering expense

(139,103)

(143,814)

(145,174)

(143,181)

(147,586)

--

--

--

--

--

Revenue:

Costs and expenses

Restructuring expense (benefit) and asset impairment

Goodwill Impairment
Total Costs and Expenses
Operating Income
Operating profit margin

--

--

--

--

--

(504,705)

(390,337)

(363,403)

(368,680)

(393,008)

178,624

259,137

276,079

274,387

269,337

26%

40%

43.17%

42.67%

40.66%

Income before Provision for Income Taxes (EBT)

178,624

259,137

276,079

274,387

269,337

Provision for Income Taxes

(64,305)

(93,830)

(104,202)

(100,471)

(100,256)

Income from Continuing Operations

114,319

165,307

171,877

173,916

169,081

Net Income

114,319

165,307

171,877

173,916

169,081

41

2. Discounted Cash Flow analysis:

2.1 Basic Inputs
Basic Inputs
Company Name
Currency
Unit
Current Year End
Valuation Date
% of year remaining
Number of Historic Periods

Harley-Davidson
USD
Thousand
31 dec 15
25 may 15
60.0%
3

Number of Shares (thousand)

Current Share Price

211,000
57.00

Share price assumption

Terminal Assumptions - P&L

Motorcycle Segment
Terminal COGS as % of sales
60.6%
Terminal SG&A as % of sales
18.2%
Terminal D&A as % of sales
3.1%
Financial Services Segment
Terminal Sales Growth
12.0%
Terminal COGS as % of sales
23.7%
Terminal SG&A as % of sales
34.4%
Terminal D&A as % of sales
1.1%
General
Terminal Tax rate
35.5%
Terminal effective interest on cash 0.6%
Terminal effective rate on debt
0.9%

Terminal Assumptions - BS
Terminal Days Inventories
45 days
Terminal Days Receivables
127 days
Terminal Days Payables
25 days
Terminal debt to EBITDA
3.8x
Terminal Capex as % of sales
3.5%

2.2 Forecasts P&L

31 dec 12

31 dec 13

31 dec 14

31 dec 15

31 dec 16

31 dec 17

31 dec 18

31 dec 19

31 dec 20

HDMC Segment
Sales

4,942,582

5,258,290

5,567,681

5,843,310

6,169,248

6,520,831

6,900,533

7,311,107

7,755,622

Units Shipped

247,625

260,471

270,726

278,848

288,872

299,537

310,895

323,003

335,924

Spending per unit ($)

19,960

20,188

20,566

20,955

21,356

21,770

22,196

22,635

23,087

COGS

(3,059,735)

(3,235,737)

(3,371,414)

(3,538,316)

(3,735,683)

(3,948,578)

(4,178,500)

(4,427,116)

(4,696,284)

Restructuring

(28,475)

2,131

--

--

--

--

--

--

--

SG&A

(967,574)

(985,171)

(1,013,370)

(1,063,537)

(1,122,860)

(1,186,852)

(1,255,961)

(1,330,689)

(1,411,595)

D&A

(162,659)

(160,181)

(171,187)

(180,267)

(190,963)

(202,525)

(215,040)

(228,601)

(243,317)

EBIT

724,139

879,332

1,011,710

1,061,190

1,119,742

1,182,876

1,251,033

1,324,701

1,404,426

HDFS Segment

12.91%

12.20%

11.87%

Sales

637,924

641,582

660,827

697,919

741,500

788,706

839,900

895,490

955,933

COGS

(189,671)

(158,600)

(156,363)

(165,140)

(175,452)

(186,621)

(198,735)

(211,888)

(226,190)

SG&A

(165,897)

(201,721)

(227,078)

(239,824)

(254,800)

(271,021)

(288,613)

(307,715)

(328,485)

D&A

(6,319)

(6,891)

(8,113)

(8,410)

(8,769)

(9,155)

(9,569)

(10,013)

(10,491)

EBIT

276,037

274,370

269,273

284,546

302,479

321,909

342,984

365,874

390,767

EBIT

1,000,176

1,153,702

1,280,983

1,345,736

1,422,222

1,504,785

1,594,016

1,690,574

1,795,193

Interest Income

7,369

5,859

6,499

--

--

--

--

--

--

Interest Expense

(46,033)

(45,256)

(4,162)

(6,585)

(10,482)

(16,703)

(26,647)

(42,564)

(68,072)

EBT

961,512

1,114,305

1,283,320

1,339,151

1,411,740

1,488,082

1,567,369

1,648,010

1,727,121

Tax Expense

(337,587)

(380,312)

(438,709)

(475,398)

(501,168)

(528,269)

(556,416)

(585,044)

(613,128)

EAT

623,925

733,993

844,611

863,752

910,572

959,813

1,010,953

1,062,967

1,113,993

General figures

42

2.3 Forecasts BS
31 dec 12
393,524
1,973,124
257,386
5,102,649

Inventories
Receivables
Payables
Debt
Capex

31 dec 13
424,507
2,034,751
239,794
5,259,170
194,085

31 dec 14
448,871
2,164,256
196,868
5,504,629
219,900

31 dec 15
469,499
2,274,190
213,882
5,784,063
230,941

31 dec 16
494,012
2,404,005
233,756
6,114,057
243,987

31 dec 17
520,401
2,544,152
255,769
6,470,323
258,066

31 dec 18
548,844
2,695,636
280,185
6,855,420
273,279

31 dec 19
579,537
2,859,578
307,300
7,272,198
289,737

31 dec 20
612,698
3,037,228
337,453
7,723,836
307,565

2.4 Drivers P&L

31 dec 12

31 dec 13

31 dec 14

31 dec 15

31 dec 16

31 dec 17

31 dec 18

31 dec 19

31 dec 20

HDMC Segment
Units shipped growth

5.2%

3.9%

3.0%

3.6%

3.7%

3.8%

3.9%

4.0%

Real world GDP Growth

3.3%

3.3%

3.5%

3.6%

3.7%

3.8%

3.9%

4.0%

Difference

1.9%

0.6%

(0.5%)

--%

--%

--%

--%

--%

Price Growth

1.1%

1.9%

1.9%

1.9%

1.9%

2.0%

2.0%

2.0%

COGS as % of sales

61.9%

61.5%

60.6%

60.6%

60.6%

60.6%

60.6%

60.6%

60.6%

SG&A as % of sales

19.6%

18.7%

18.2%

18.2%

18.2%

18.2%

18.2%

18.2%

18.2%

D&A as % of sales

3.3%

3.0%

3.1%

3.1%

3.1%

3.1%

3.1%

3.1%

3.1%

HDFS sales as a % of HDMC sales

12.9%

12.2%

11.9%

11.9%

12.0%

12.1%

12.2%

12.2%

12.3%

COGS as % of sales

29.7%

24.7%

23.7%

23.7%

23.7%

23.7%

23.7%

23.7%

23.7%

SG&A as % of sales

26.0%

31.4%

34.4%

34.4%

34.4%

34.4%

34.4%

34.4%

34.4%

D&A as % of sales

1.0%

1.1%

1.2%

1.2%

1.2%

1.2%

1.1%

1.1%

1.1%

Effective rate on debt

0.90%

0.86%

0.08%

0.11%

0.17%

0.26%

0.39%

0.59%

0.88%

Effective tax rate

35.1%

34.1%

34.2%

35.5%

35.5%

35.5%

35.5%

35.5%

35.5%

HDFS Segment

2.5 Drivers BS
Days Inventories
Days Receivables
Days Payables
Debt to EBITDA
Capex (% of sales)

31 dec 12
44 days
129 days
29 days
4.36x

31 dec 13
46 days
126 days
26 days
3.98x
3.3%

31 dec 14
46 days
127 days
20 days
3.77x
3.5%

31 dec 15
46 days
127 days
21 days
3.77x
3.5%

31 dec 16
46 days
127 days
22 days
3.77x
3.5%

31 dec 17
46 days
127 days
23 days
3.77x
3.5%

31 dec 18
46 days
127 days
23 days
3.77x
3.5%

31 dec 19
46 days
127 days
24 days
3.77x
3.5%

31 dec 20
45 days
127 days
25 days
3.77x
3.5%

2.6 Working Capital

WC
Inventories
+ Receivables
- Payables
WC
(Increase in WC)

31 dec 12
393,524
1,973,124
(257,386)
2,109,262

31 dec 13
424,507
2,034,751
(239,794)
2,219,464
(110,202)

31 dec 14
448,871
2,164,256
(196,868)
2,416,259
(196,795)

31 dec 15
469,499
2,274,190
(213,882)
2,529,808
(113,549)

31 dec 16
494,012
2,404,005
(233,756)
2,664,261
(134,454)

31 dec 17
520,401
2,544,152
(255,769)
2,808,784
(144,522)

31 dec 18
548,844
2,695,636
(280,185)
2,964,295
(155,511)

31 dec 19
579,537
2,859,578
(307,300)
3,131,815
(167,520)

43

31 dec 20
612,698
3,037,228
(337,453)
3,312,473
(180,658)

2.7 WACC calculation

Capital Structure
Amount of Debt
Amount of Equity
Share of Debt
Share of Equity

4,145,377
2,909,286
58.8%
41.2%

Cost of Equity Calculation

Risk Free Rate
ERP
Beta
Cost of Equity
Cost of Debt Calculation
Rate on Debt
Tax Rate

2.2%
5.8%
1.5
10.8%
3.1%
35.5%

After-tax Cost of Debt

WACC Calculation
WACC
Terminal Growth
Terminal Multiple

2.0%
5.6%
2.0%
5.0x

2.8 Exit Multiple estimation

Enterprise Value /
EBITDA 2015E

Company Name

Yamaha Motor Co Ltd

Suzuki Motor Corp
Polaris Industries Inc.
Kawasaki Heavy Industries Ltd
BMW AG
Honda Motor Co Ltd
Median

6.6 x
4.7 x
9.6 x
9.0 x
4.4 x
7.5 x
7.1 x

2.9 DCF results

31 dec 12
EBIT
Tax on EBIT
DA
Change in WC
Capex
FCF
WACC
Discount Factor
DCF

31 dec 13
1,153,702
(393,758)
167,072
(110,202)
(194,085)
622,729

31 dec 14
1,280,983
(437,910)
179,300
(196,795)
(219,900)
605,678

Exit Multiple Valuation Result

Sum of Discounted FCF
EBITDA Exit Multiple
Terminal Value
Enterprise Value
less net debt
Equity Value
HOG Price
Upside / (Downside)

31 dec 15
1,345,736
(477,736)
188,676
(113,549)
(230,941)
712,187
5.6%
100.0%
712,187

31 dec 16
1,422,222
(504,889)
199,732
(134,454)
(243,987)
738,624
5.6%
94.7%
699,344

31 dec 17
1,504,785
(534,199)
211,680
(144,522)
(258,066)
779,678
5.6%
89.6%
698,957

31 dec 18
1,594,016
(565,876)
224,608
(155,511)
(273,279)
823,958
5.6%
84.9%
699,371

31 dec 19
1,690,574
(600,154)
238,614
(167,520)
(289,737)
871,777
5.6%
80.4%
700,609

31 dec 20
1,795,193
(637,293)
253,808
(180,658)
(307,565)
923,484
5.6%
76.1%
702,695

4,213,163
7.1x
10,690,686
14,903,849
3,181,372
11,722,476
55.6
(2.5%)

44

31 dec 21
1,831,097
(650,039)
258,884
(184,271)
(313,716)
5.6%
72.0%

2.10 Sensitivity Analysis

HOG Equity Value Sensitivity Table

WACC
11,722,476
5.3%
5.5%
5.7%
5.9%
6.1%

6.1x
10,406,096
10,280,247
10,155,969
10,033,238
9,912,034

EBITDA Exit Multiple

6.6x
7.1x
7.6x
11,172,003
11,937,909
12,703,816
11,037,484
11,794,721
12,551,958
10,904,651
11,653,333
12,402,015
10,773,478
11,513,718
12,253,957
10,643,942
11,375,850
12,107,758

8.1x
13,469,722
13,309,196
13,150,697
12,994,197
12,839,666

HOG Price Sensitivity Table

WACC
56
5.3%
5.5%
5.7%
5.9%
6.1%

6.1x
49.3
48.7
48.1
47.6
47.0

EBITDA Exit Multiple

6.6x
7.1x
52.9
56.6
52.3
55.9
51.7
55.2
51.1
54.6
50.4
53.9

7.6x
60.2
59.5
58.8
58.1
57.4

8.1x
63.8
63.1
62.3
61.6
60.9

7.6x
5.6%
4.4%
3.1%
1.9%
0.7%

8.1x
12.0%
10.7%
9.3%
8.0%
6.8%

HOG Upside (Downside) Sensitivity Table

WACC
(0)
5.3%
5.5%
5.7%
5.9%
6.1%

6.1x
(13.5%)
(14.5%)
(15.6%)
(16.6%)
(17.6%)

EBITDA Exit Multiple

6.6x
7.1x
(7.1%)
(0.7%)
(8.2%)
(1.9%)
(9.3%)
(3.1%)
(10.4%)
(4.3%)
(11.5%)
(5.4%)

45

3. Comparable companies analysis:

3.1 List of peers used and their trading multiples:
Company Name

Enterprise Value /

Enterprise Value /

EBITDA 2015E

EBIT 2015E

Yamaha Motor Co Ltd

Suzuki Motor Corp
Polaris Industries Inc.
Kawasaki Heavy Industries Ltd

6.6 x
4.7 x
9.6 x
9.0 x

11.0 x
9.4 x
12.1 x
11.0 x

3.2 EBITDA multiple valuation:

EBITDA Multiple

Enterprise Value (HDMC)

9.6 x
9.2 x
7.8 x
6.1 x
4.7 x

12,168,739
11,598,330
9,887,101
7,763,909
5,957,612

Maximum
75th Percentile
Median
25th Percentile
Minimum

Equity Value (HDMC)

Total Equity Value

(HDMC+HDFS)

12,742,634
12,172,225
10,460,996
8,337,804
6,531,507

Implied Share
Price($)

13,718,486
13,148,077
11,436,848
9,313,656
7,507,359

Cashxxviii

573,895
573,895
573,895
573,895
573,895

Upside
(Downside)

65.0
62.3
54.2
44.1
35.6

14.1%
9.3%
(4.9%)
(22.6%)
(37.6%)

3.3 EBIT multiple valuation:

Maximum
75th Percentile
Median
25th Percentile
Minimum

EBIT Multiple

Enterprise (HDMC)

Cash

12.1 x
11.3 x
11.0 x
10.6 x
9.4 x

13,155,393
12,232,564
11,920,663
11,490,607
10,213,313

573,895
573,895
573,895
573,895
573,895

Equity Value (HDMC)

Total Equity Value

(HDMC+HDFS)

Implied Share
Price($)

Upside
(Downside)

13,729,288
12,806,459
12,494,558
12,064,502
10,787,208

14,705,140
13,782,311
13,470,410
13,040,354
11,763,060

69.7
65.3
63.8
61.8
55.7

22.3%
14.6%
12.0%
8.4%
(2.2%)

46

3.4 Average figures:

Maximum
75th Percentile
Median
25th Percentile
Minimum

Enterprise (HDMC)

Cash

Equity Value (HDMC)

12,662,066
11,915,447
10,903,882
9,627,258
8,085,462

573,895
573,895
573,895
573,895
573,895

13,235,961
12,489,342
11,477,777
10,201,153
8,659,357

Total Equity Value

(HDMC+HDFS)

Implied Share
Price($)

Upside (Downside)

14,211,813
13,465,194
12,453,629
11,177,005
9,635,209

67.4
63.8
59.0
53.0
45.7

18.2%
12.0%
3.5%
(7.1%)
(19.9%)

47

Bibliography & Sources of Data

Bibliography
1.
2.
3.
4.
5.
6.
7.
8.

Harley-Davidson annual/quarterly reports (2009-2014)

Motorcycles in China, MarketLine Report
Motorcycles in India, MarketLine Report
Blame Harley-Davidson's Downfall On Baby Boomer Demographics, Forbes
Analysis: As boomers age, Harley hunts for younger riders, Reuters
Harley-Davidson, Inc.: Geared Up For A Strong Ride, seekingalpha.com
HOG Equity Research Report 2015, Morningstar 30/01/2015
A15 Motorcycle Industry www.TheEpochTimes.com

Primary Sources of Data

1.
2.
3.
4.
5.

Companys reports
FactSet Database
Thomson Reuters Database
Company-related articles mentioned in the report
Damodarans Database - http://pages.stern.nyu.edu/~adamodar/

48

End notes
i

Source: http://www.wikinvest.com/stock/Harley-Davidson_(HOG)

Unless the context otherwise requires, all references to the Company include HarleyDavidson, Inc. and all of its subsidiaries.
ii

Source:
MarketLine.html
iii

http://www.reportlinker.com/p02100644-summary/Motorcycles-in-China-

iv

Source: http://www.reportlinker.com/p0184813-summary/Motorcycles-in-India.html

Source: Harley-Davidson 2014 Annual Report

Source :
http://shoraipower.com/SHORAI-LFX-BATTERIES-ANNOUNCES-STRATEGICPARTNERSHIP-WITH-KIMPEX-CANADIAN-MOTORCYCLE-PARTS-AND-ACCES
vi

Source:
strong-ride
vii

http://seekingalpha.com/article/2571215-harley-davidson-inc-geared-up-for-a-

Including ATVs

viii
ix

Includes ATVs, Utility Vehicles, Personal Watercraft and General-purpose Gasoline Engines

Source: Morningstar Equity Research Report 2015. 30/01/2015

xi

Source: Morningstar Equity Research Report, published on 30/01/2015.

xii

Ibidem

xiii

Source: 2013 Harley Davidson Annual Report

xiv

Source: 2013 Harley Davidson Annual Report

xv

Europe Middle East Asia and Africa

xvi

601+cc engine displacement motorcycles

Balance sheet figures were taken as average at the beginning and the end of the
corresponding period. For example, ROEt=Net Profitt/Average(Equityt-1;Equityt)
xviii Income elasticity of demand on luxury goods is greater than 1, implying that people sacrify
consumption of these goods more rapidly than their income falls.
xvii

xix

The average price of the motorbike itself plus accessories

xx

Because Capex depends on Sales

xxi

Days receivables outstanding, days inventories outstanding and days payables outstanding.

xxii

Updated in January 2015

xxiii

5-year beta obtained from monthly data on returns.

xxiv

Current yield of a bond equals to a coupon divided by the current price of security.

xxv

EBIT 2015E and EBITDA 2015E are taken from DCF model projections

xxvi

Yamaha Motor, Suzuki Motor, Polaris Industries, Kawasaki Heavy Industries.

49

xxvii

Average of DCF and Comparable Companies Analysis approaches

xxviii

Cash possessed by HDMC division

50